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Clear Thoughts
Is Venture Capital Good for America?
Originally Published Friday, February 4, 2005
| The last quarter of 2004 was the largest fund raising quarter for venture capital in more than 3 years. We at Clear feel that funding innovation is the key to creating successful companies and making our economy great. Will the venture capitalists get it right this time around? Will they follow the principles on which the venture capital industry was based? |
As investors who seek out the best possible firms for our portfolios, we recognize that venture capital plays a vital role in bringing our future investments to the market. We believe that our success as a nation also depends on venture capital's ability to find and support tomorrow's best businesses.
The year 2004 was, in many ways, a good year for the venture capital industry. It ended with the largest fund raising quarter in 3½ years. Venture capitalists raised $6 billion during Q4 2004, the fastest pace since Q2 of 2001 when the industry took in $10.2 billion (based on data released by Thomson Venture Economics and the National Venture Capital Association). For the full year 2004, $17.6 billion was raised, more than the industry raised in 2002 and 2003 combined. A significant number of venture-backed firms saw successful initial public offerings of stock or received buyout offers which helped fueled this new round of fund raising.
Venture capitalists are investing again. The industry put $20.9 billion into startups in 2004, an 11 percent increase from 2003. Now some of the media and in the industry are worried that the supply of money in venture capital funds could exceed the number of startups with viable investment plans.
What does this all mean to the stock market and our country?
We feel that real innovation is the key to founding new companies, spawning new industries and creating new markets. Yes, we believe these new firms should arrive complete with working revenue models and business plans. The viability of the "business" side of a company should be a given. A new company with a new technology seeking a market to sell it in is set up for failure. If a new firm that finds a market seeking a new product, service or technology and can provide it efficiently, if well financed, has a fighting chance to succeed and even to become "the next big thing."
Innovation properly focused creates good companies, industries, profits and jobs. This is very good for America.
What are the venture capitalists willing to fund? Will they take the risks necessary to seek out and fund true innovation? Are they so burnt by the bubble bursting that they are afraid of innovation?
We see some venture firms teaming up to provide funding as a group to reduce their individual risk exposure. In a more worrisome trend, we see them "going with what they know" and only swinging for the fences occasionally. This risk aversion will result in creating more of the same, not in bringing the next great value-added ideas to market.
There are only so many high-quality deals each year available for venture capitalists. There are fewer such prospects that bring real innovation.
We challenge the industry to seek out innovators willing to push into genuinely new directions, not just companies that "build better mouse traps" that solely exploit existing markets. Venture capitalists should be uncovering, supporting, funding and helping to foster real innovation. The "exit strategy" all venture funds seek has historically bared plenty of fruit when true innovation is achieved.
That philosophy is the original root of the venture industry and we believe would best benefit the new companies, venture capitalists and their investors, the markets, and ultimately, our country.
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